Impacts Are Complex
The new tax law brings many changes for individuals and corporations. Much has been written about the provisions of the law which goes into effect in 2018, and this coverage will focus upon how the changes might affect homeowners or those who are considering purchasing. In general, the tax benefit for owning will be lessened. Here is why:
• Lower tax rates. Though the tax rates will not come down for individuals as sharply as they will for corporations, any reduction in tax rates will reduce somewhat the tax benefits of having a home loan. For example, if someone was in a 25% tax bracket and now is in a 22% tax bracket, there would be a 12% reduction in benefits. How much your tax benefit will be reduced will vary, not only by gross income, but also because of the elimination of personal exemptions and the enlargement of the standard deduction.
• Larger standard deduction. The larger standard deduction will mean that married couples financing lower-cost homes are likely to see little or no tax benefit from having a home loan. For example, if a married couple has mortgage interest of $15,000 per year and no more than $9,000 in additional deductions, they will be better off taking the standard deduction. The tax benefit is reduced even for those who exceed the $12,000 (for singles) or $24,000 (for married couples) caps and do itemize, since the tax benefit accrues only toward the amount above these caps.
• Maximum loan size. The maximum home loan which can be written off will move from one million dollars to $750,000. This lower cap will affect those who own expensive properties and/or live in high-cost areas, though existing loans are exempted from the lower cap.
• Maximum state deductions. The $10,000 cap on state and local income and property tax deductions again will have a greater effect upon those who have higher incomes, own more expensive homes and/or live in higher cost areas. It should also be noted that deduction for moving expenses is also going away.
• Home equity loans. The new law keeps the deduction for debt on second homes, but does not allow the deduction of home equity debt. Apparently, this provision applies to existing home equity debt. This might change how owners pay for expensive renovations or perhaps they skip the renovations and purchase a new home.
While these changes may look like a negative for home ownership, the net-effect upon housing could be positive. Putting more spending money in the hands of consumers could boost the economy which creates jobs and more demand for housing. The tax law also did not change the benefit of owning and then selling a home as compared to other investments, as the capital gains exclusion for primary residences was not touched. Therefore, while the tax write-off may become less important, a home could become an even better investment. Homes also provide protection against inflation and forced savings plans, while renting provides none of these benefits.
Note that the tax law is very new, and the IRS has not issued regulations or instructions to implement the law. This information provided is based only upon what has been published by the media reporting upon the law. We expect many clarifications, and perhaps even technical amendments, to the law in the coming months. We suggest you speak with your accountant for tax advice based upon the new law and for updates as they are issued.